Michael Kors Sports Fashionably High Earnings Growth Expectations

Jun.28.14 | About: Michael Kors (KORS)

Summary

I sold the stock at a higher price and am sniffing around to see if I should get back in.

The financial efficiency ratios are some of the best I've ever seen.

The risk/reward ratio is a bit high for me right now.

Michael Kors Holdings Ltd (NYSE:KORS) is a global lifestyle brand which designs apparel, footwear, and accessories with a presence in over 85 countries. On May 28, 2014, the company reported fiscal fourth-quarter earnings of $0.78 per share which beat the consensus of analyst estimates by $0.10. During the past year, the company's stock price is up 52.08%, and is beating the S&P 500 (NYSEARCA:SPY), which has gained 23.14% in the same time frame. I recently sold Kors out of my growth portfolio because I felt it was time to get out of the stock and put the money towards something else at that time. With all this in mind, I'd like to take a moment to evaluate the stock on a fundamental, financial, and technical basis to see if I should add it back into my portfolio at this time.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 28.04, which is fairly priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 18.92 is currently fairly priced for the future in terms of the right here, right now. The 1-year PEG ratio (1.41), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is fairly priced based on a 1-year EPS growth rate of 19.88%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 19.88%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 23.82%.

Financials

On a financial basis, the things I look for in general are the dividend payouts, return on assets, equity and investment. The company does not sport a dividend to speak of, but is sporting return on assets, equity, and investment values of 35.6%, 44% and 36.6%, respectively, which are great values. In this particular instance, I will forego the dividend aspect of the financials because the stock is in my growth portfolio; and in the growth portfolio, a stock does not have to have a dividend.

The really high return on assets value (35.6%) is important because it is a measure of how profitable the company is relative to its assets, telling us how efficient a management team is at using its assets to generate earnings (for comparison purposes, Kors has the highest ROA in the textile - apparel clothing sector ahead of Lululemon Athletica Inc. (NASDAQ:LULU), which sports an ROA of 24.7%, and Gildan Activewear Inc. (NYSE:GIL), which sports an ROA of 15.8%).

The really high return on equity value (44%) is an important financial metric for purposes of comparing the profitability, which is generated with the money shareholders have invested in the company to that of other companies in the same industry (for comparison purposes, Kors has the third highest ROE in the textile - apparel clothing sector behind American Apparel, Inc. (APP), which sports an ROE of 106.7%, and Vince Holding Corp (NYSE:VNCE), which sports an ROE of 50.1%).

The really high return on investment value (36.6%) is an important financial metric because it evaluates the efficiency of an investment that a company makes and if an investment doesn't have a positive ROI then the investment should not be made (for comparison purposes, Kors has the highest ROI in the textile - apparel clothing sector ahead of Kate Spade & Company (NYSE:KATE), which sports an ROI of 34%, and Lululemon, which sports an ROI of 25%).

Technicals

Click to enlarge

Looking first at the relative strength index chart [RSI] at the top, I see the stock in middle-ground territory with a current value of 43.08. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is below the red line with the divergence bars increasing in height, indicating bullish momentum may start to mount. As for the stock price itself ($90), I'm looking at the 20-day simple moving average (currently $91.98) to act as resistance and $85.62 to act as support for a risk/reward ratio, which plays out to be -4.87% to 2.2%.

Recent News

About a month ago the company reported fiscal fourth quarter earnings of $0.78 per share on revenue of $917.5 million, both beating expectations of $0.68 per share and $816.51 million. The company's strong results were due to a 26.2% increase in comp-store sales during the quarter versus expectations of 20-22%, along with gross profit improving 20 basis points to 59.9%, and licensing revenue increasing 79% year over year to $35.4 million. Not only that, but the company issued strong guidance for the first fiscal quarter and entire fiscal 2015. The company sees first quarter earnings between $0.78 and $0.80 while fiscal year 2015 earnings between $3.85 and $3.91 per share versus expectations of $0.79 and $3.85, respectively.

Conclusion

There is no doubt the stock has had a beastly move upwards in the past year, and with the world economy not yet running on all cylinders you have to assume that the company has been eating someone else's lunch, and I believe that someone to be Coach Inc (NYSE:COH). As you can see from the chart below, the two stocks are mirror images from one another.

Click to enlarge

I sold Kors for a 28.59% gain, or 49.84% on an annualized basis. I just felt it was time to leave Kors because it was a good gain and I felt like just locking in some profits. I sold the stock at $93.91 So I'm taking a look at it right now because it is still under my selling price.

Fundamentally, I believe the stock to be fairly valued on next year's earnings estimates and on growth potential while sporting excellent near- and long-term earnings growth expectations. Financially, there isn't a dividend to speak of but the financial metrics are top of the class. On a technical basis, I believe the risk/reward ratio is a bit high right now. I'm not going to by buying the stock right now because I feel I can get it at a little bit lower of a price due to the overall market sentiment right now.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: The author is long LULU, SPY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.